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Market Discipline in Emerging Economies: Beyond Bank Fundamentals

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  • Eduardo Levy Yeyati
  • Maria Soledad Martinez Peria
  • Sergio Schmukler

Abstract

This paper studies how institutional factors and systemic risks (driven by macroeconomic conditions) prevalent in emerging economies may impact market discipline among banks (traditionally understood as market responses to bank fundamentals). First, we discuss how certain institutional features of emerging economies (underdeveloped capital markets, pervasive government ownership of banks, greater guarantees, inadequate disclosure and transparency) may affect market responses to bank risk. Second, using the recent Argentine crisis as an illustration, we argue that systemic risks may exert an overwhelming impact on market behavior, overshadowing the link between the latter and bank fundamentals. Thus, market discipline, while missing in the traditional sense, may be indeed quite robust once systemic risks are factored in. We conclude that in emerging economies the analysis of market discipline should take into account the importance of institutional and systemic factors.

Suggested Citation

  • Eduardo Levy Yeyati & Maria Soledad Martinez Peria & Sergio Schmukler, 2004. "Market Discipline in Emerging Economies: Beyond Bank Fundamentals," Business School Working Papers marketdiscipline, Universidad Torcuato Di Tella.
  • Handle: RePEc:udt:wpbsdt:marketdiscipline
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    File URL: http://www.utdt.edu/departamentos/empresarial/cif/pdfs-wp/wpcif-012004.pdf
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    References listed on IDEAS

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    7. Augusto de la Torre & Eduardo Levy Yeyati & Sergio L. Schmukler, 2003. "Living and Dying with Hard Pegs: The Rise and Fall of Argentina’s Currency Board," ECONOMIA JOURNAL, THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION - LACEA, vol. 0(Spring 20), pages 43-108, January.
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    10. Schumacher, Liliana, 2000. "Bank runs and currency run in a system without a safety net: Argentina and the 'tequila' shock," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 257-277, August.
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    12. María Soledad Martínez-Peria & Sergio Schmukler, 2002. "Do Depositors Punish Banks for Bad Behavior? Market Discipline, Deposit Insurance, and Banking Crises," Central Banking, Analysis, and Economic Policies Book Series,in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 5, pages 143-174 Central Bank of Chile.
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    Cited by:

    1. Sergio L. Schmukler & Eduardo Levy-Yeyati & Maria Soledad Martinez Peria, 2004. "Market Discipline under Systemic Risk: Evidence from Bank Runs in Emerging Economies," Econometric Society 2004 Latin American Meetings 318, Econometric Society.
    2. Alexei Karas & William Pyle & Koen Schoors, 2006. "Sophisticated Discipline in Nascent Deposit Markets: Evidence from Post-Communist Russia," William Davidson Institute Working Papers Series wp829, William Davidson Institute at the University of Michigan.
    3. Karas, Alexei & Pyle, William & Schoors, Koen, 2006. "Sophisticated discipline in a nascent deposit market : evidence from post-communist Russia," BOFIT Discussion Papers 13/2006, Bank of Finland, Institute for Economies in Transition.
    4. Lukas Menkhoff & Chodechai Suwanaporn, 2007. "On the rationale of bank lending in pre-crisis Thailand," Applied Economics, Taylor & Francis Journals, vol. 39(9), pages 1077-1089.
    5. Wu, Yuliang & Bowe, Michael, 2012. "Information disclosure and depositor discipline in the Chinese banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 855-878.
    6. Alexei Karas & William Pyle & Koen Schoors, 2010. "How do Russian depositors discipline their banks? Evidence of a backward bending deposit supply function," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 36-61, January.
    7. Vasso P. Ioannidou & Jan De Dreu, 2005. "The impact of explicit deposit insurance on market discipline," Proceedings 992, Federal Reserve Bank of Chicago.
    8. Virginia Goday & Bertrand Gruss & Jorge Ponce, 2005. "Depositors’ Discipline in Uruguayan Banks," Documentos de trabajo 2005003, Banco Central del Uruguay.
    9. Eduardo Levy Yeyati & Alain Ize & Miguel A. Kiguel, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economies," IMF Working Papers 05/188, International Monetary Fund.
    10. Semenova Maria, 2007. "How depositors discipline banks: the case of Russia," EERC Working Paper Series 07-02e, EERC Research Network, Russia and CIS.
    11. Helder Mendonça & Renato Villela Loures, 2009. "Market discipline in the Brazilian banking industry: an analysis for the subordinated debt holders," Journal of Regulatory Economics, Springer, vol. 36(3), pages 286-307, December.
    12. Alain Ize & Miguel Kiguel & Eduardo Levy Yeyati, 2005. "Managing Systemic Liquidity Risk in Financially Dollarized Economy," Business School Working Papers managsystrisk, Universidad Torcuato Di Tella.

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